Focus on German Inflation Data Today

Today, significant attention is directed towards the German inflation data for December, which will serve as a crucial indicator for anticipated euro area data releases scheduled for tomorrow. The increase in Spanish inflation exceeding expectations in December, driven importantly by core inflation, adds to the urgency of analyzing this data.

Analysts expect that the euro area HICP inflation will rise to 2.4% year-on-year for December, up from 2.2% in November. This anticipated increase is primarily attributed to base effects related to energy and food prices. Conversely, core inflation is projected to experience a slight decline from 2.7% in November to 2.6% in December. A key point is that the expected monthly increase in core inflation is likely to align with the ECB's 2% inflation target when annualized. This outlook could positively influence the ongoing discussions regarding potential rate cuts by the European Central Bank (ECB).

Additionally, the euro area will release its final service and composite PMI figures for December today. As the flash report was released earlier in the month, there could be more significant variations in the final data, necessitating careful examination. The final manufacturing PMI had previously come in at 45.1, reflecting a minor downgrade from the initial estimate of 45.2.

The United States and the United Kingdom will also release service PMIs today. In tandem with these developments, tomorrow, we can anticipate further inflation data from the euro area, along with inflation statistics from Switzerland and the ISM services index from the US. Following that, minutes from the December Federal Reserve meeting and Swedish CPI data will be published on Wednesday, with the ECB releasing its Economic Bulletin on Thursday. Finally, Friday will feature the release of the US jobs report for December, as well as inflation figures from Denmark and Norway.

Economic and Market Updates

What Happened Overnight

In China, the Caixin service PMI for December registered at 52.2, representing a rise from the previous month's 51.5. This aligns with the official NBS survey reported last week and indicates the highest growth within the Chinese service sector since May.

Japan's service PMI for December came in at 50.9, up from 50.5 in November, although it is below the flash estimate of 51.4. This marks the second consecutive month of expansion in the service sector activities in Japan.

Weekend Developments

In the US, the ISM manufacturing report highlighted robustness, noting improvements in new orders, production, and pricing, despite weaker employment figures. These findings present mixed signals when contrasted with the PMIs, which suggest that output and new orders remained close to November levels. Overall, both ISM and PMI continue to indicate stagnant growth, consistent with recent hard data trends in industrial production and capacity utilization.

Federal Reserve officials discussed the ongoing challenges in managing inflation while emphasizing the importance of not jeopardizing the labor market. Although they did not offer detailed guidance on future rate decisions, there remains an expectation for a rate cut during the March meeting, followed by possible quarterly reductions of 25 basis points until 2026.

In the equities markets, global stocks finished higher on the second trading day of the new year. However, there was a notable divergence in performance between the US and European markets. While European stocks closed lower, US equities made considerable gains, particularly within cyclical sectors. The Dow rose by 0.8%, the S&P 500 by 1.3%, the Nasdaq by 1.8%, and the Russell 2000 by 1.7%. In Asia, the trading performance is mixed with declines in China and Japan, while Taiwan and South Korea saw gains exceeding 2%. US futures are varied, and core European futures are showing strength.

Fixed Income Overview

The push for lower interest rates remains complex, particularly as discussions around managing US inflation continue. Observations from Federal Reserve officials underscore the need for vigilance concerning the labor market, especially ahead of the nonfarm payrolls report due on Friday. The upcoming eurozone inflation data is anticipated to show a modest rise, coinciding with considerable bond issuance and the conclusion of certain ECB reinvestments, creating pressure on the long end of yield curves in both Europe and the US. Notably, 10-year yields have increased by approximately 40 basis points since early December.

Foreign Exchange Market Activity

On Friday, the foreign exchange markets experienced a reversal of trends seen on Thursday, with the euro and Central and Eastern European currencies gaining ground, partially due to stabilizing European natural gas prices. As a result, the EUR/USD returned to around the 1.03 level, while EUR/Scandies also rose modestly. The USD/JPY continues to trade in the high 150s, while the EUR/GBP has remained near the 0.83 mark.

Germany, Inflation, Eurozone